Large investors with strong stomachs for choppy waters may well prosper from UK commercial real estate in the medium to long term, but the market remains fragile and administrations have spooked even those with the deepest pockets.
New research from BNP Paribas Real Estate estimates that UK commercial real estate could attract one-third less investment (£41 billion) this year compared to last year. While more than £18 billion was poured into the sector in H1 2023, it was less than half of commitments in H1 2022. Predicting a peak bank rate of 5.50-5.75% by the end of the year, BNP expects further market volatility to impact decision making.
On the plus side, rate cuts in Q2 2024 could bring marginal improvement to sentiment, lifting investment by 15% to £47m next year. Pension funds are already indicating an improved appetite for commercial real estate. Investment manager Downing says that 86% of 50 UK defined benefit pension fund executives who took part in its recent survey want to increase allocations to real estate development.
For the time being, debt availability remains tight for new developments; many of those already underway or completed are suffering higher costs after consecutive rate hikes. Recent months have seen major falls into administration by Canary Wharf’s Churchill Place and Doncaster’s Enterprise Park, among others.
Yields will need to rise further to encourage investors, whether institutional or private: either the rents being paid need to go up, or the value of a property has to go down – or a bit of both. While investors from Asia are still interested in big (£100m+) central London deals, greater risk for investor-owners and banks may lie regionally: large foreign buyers are scarce; tenants’ businesses are failing because of rising staff and energy costs, while revenues are squeezed by broader demand factors; and sectors such as ‘physical’ retail, hospitality and light industrial show few signs of recovery.
Needless to say, all stakeholders in the fragile UK commercial property market need to stay ahead of the game with early negotiation on refinancing and taking pre-emptive action on the future of their company structures. The restructuring and insolvency toolbox is large and deep for those in need of a creative approach to ensure business longevity.
Written by Bea Vakharia, Analyst at Buchler Phillips, a UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.